Munich Personal RePEc Archive China’s Renminbi Currency Logistics Network: A Brief Introduction Smith, Reginald and Zhu, Nan and Wang, Long Bouchet-Franklin Institute, Southwestern University of Finance and Economics 30 November 2008 Online at https://mpra.ub.uni-muenchen.de/11993/ MPRA Paper No. 11993, posted 15 Dec 2008 07:26 UTC China’s Renminbi Currency Logistics Network: A Brief Introduction Reginald D. Smith Bouchet-Franklin Institute, P.O. Box 10051, Rochester, NY 14610, USA Nan Zhu The MBA Education Centre, Southwestern University of Finance and Economics, P.O.Box 610074, Chengdu, China Long Wang Chengdu Branch of People’s Bank of China, P.O.Box 610041, Chengdu, China; School of Business Administration, Southwestern University of Finance and Economics, P.O.Box 610074, Chengdu, China Abstract Currency logistics is becoming a field of increasing interest and importance both in government and academic circles. In this paper, a basic description of China’s nationwide logistics network for the Renminbi is discussed and analyzed. In addition to its basic structure, its key problems such as production costs, inventory levels, and transportation and storage security are discussed. Key words: currency supply chain, China’s Renminbi currency, logistics management Oftentimes, discussions of cash or the basic money supply measure, M0(cash in circulation), is only the realm of macroeconomic theory and monetary policy. As valuable as these insights are, even in our increasingly digital economy, cash is still largely a physical medium of exchange. In almost all nations, physical cash and coins are backed, minted or printed, and supplied by a central bank in cooperation with government and commercial banks and businesses across the country. As has been discussed by Rajamani et. al. [1], Geismar, et. al. [2] and the European Central Bank [3], the nature of the logistics and physical distribution of ‘cash supply chains’, ‘cash chains’, or ‘currency chains’ is still largely untouched in the published literature with the exception of discussions Email addresses: [email protected] (Reginald D. Smith), [email protected] (Nan Zhu) Preprint submitted to Elsevier December 14, 2008 of institutional cash management. The central monetary authority of every nation, and those of supranational monetary authorities such as the European Central Bank (ECB), face the clas- sic supply-demand and distribution issues that face any businesses or militaries when distributing goods. Among the most important decisions are to contract with a public or private mint and printing bureau to produce currency, ascertain the demand for cash both within and outside of the country, how to handle the physical notes and coins based on this demand and the financial and business sector framework, the extent of public or private management of the distribution and cash warehousing network, security in this distribution network, recircula- tion of banknotes and coins back to a central authority where obsolete and debilitated currency can be removed from circulation, and how to effectively cut out counterfeit currency from the supply chain. A useful framework of the cash supply chain as a closed-loop supply chain where both forward distribution and reverse logistics are considered was dis- cussed in [1]. As seen in Figure 1, there is a forward and backward motion of notes throughout the supply chain as notes are distributed to the public and notes are take back for sorting and many are removed from circulation. Schautzer [4], Carlin [5], and the Reserve Bank of India [6] discuss the cash supply chains of Austria in the context of the EU, Australia, and India re- spectively. Each of these countries has a system of logistics that is fit to its individual circumstances. In Austria’s case, like other Euro countries, both the national central banks and the ECB work together to determine banknote demand, production, and distribution across the Eurozone. 1. China: Economy and Institutions The People’s Republic of China has undergone a rapid and massive trans- formation since 1978 when its economic liberalization began. China has now become the world’s fourth largest economy, with an estimated 2008 GDP of $3.6 Trillion according to World Bank estimates, and has undergone double digit annual growth for the last several years. Having the world’s largest popu- lation of 1.4 billion people, it unsurprisingly has the largest volume circulation of banknotes in the world [8]. The Chinese currency, the Renminbi (RMB), is non-convertible and man- aged by the People’s Bank of China (PBOC), the Chinese central bank. It is legal tender throughout mainland China but not Hong Kong S.A.R., Macau S.A.R. or Taiwan which will not be covered in this paper. Table 1, lists the coin and note denominations in the current fifth series of banknote styles which began rollout in 1999 and completed rollout in 2005 [10]. Figure 2 also shows a sample banknote, the 100 RMB denominated note. The official responsibility of cash currency policy given to the PBOC is laid out in the “People’s Bank of China Law, The People’s Republic of China” guidelines [10]. In addition, the current monetary policy is outlined in the PBOC’s“Monetary Policy” doc- uments available on its website [10]. Like most modern currencies, the RMB 2 Figure 1: Basic structure of a closed-loop currency supply chain. 3 Figure 2: 100 RMB note design. Coins (in“Yuan”) Notes (in“yuan”) 0.1 1 0.5 5 1 10 20 50 100 Table 1: Current fifth series Renminbi coin and banknote denominations. has evolved over time in order to increase durability and has added a variety of anti-counterfeiting measures to the note. 2. China’s Currency Circulation, Denominations, and Structure China has had to deal with an exponentially growing money supply during its period of rapid growth over the last few decades. In Figures 3 and 4 are M0 statistics from China over time. Figure 3 shows annual year-end M0 since 1978 and Figure 4 shows monthly M0 since December 1999. M0 has grown from 21 billion RMB in 1978 to over 3 trillion RMB at present, a 147-fold increase [10, 12]. Though the monetary policy aspects of this are widely discussed and debated, it presents a massive logistical challenge which would require a co- committed expansion in production, infrastructure, and distribution capabilities to prevent shortages. 4 Figure 3: Annual M0 by year from 1978 to October 2008. Figure 4: Monthly M0 from December 1999 to October 2008. Annual spikes are due to increased withdrawals and circulation due to gift giving and purchases on the Chinese New Year holiday. 5 1978 1987 1988 1998 1 & 2 RMB 16% 5% 5% 2% 5 RMB 30% 16% 16% 1% 10 RMB 49% 72% 48% 7% 20 RMB 4% 7% 8% 2% 50 RMB N.A. N.A. 13% 13% 100 RMB N.A. N.A. 11% 75% All coins 1% 1% N.A. N.A. Table 2: Percent of M0 each banknote represents by year; 20 RMB was calculated using a plug for 100% since numbers were not given. 10 RMB in 1988 estimated based on percent in 1987 minus share capture from 50 and 100 RMB. See Chen [14], Guo [12] 1978 1987 1988 1998 1 & 2 RMB 48% 22% 26% 38% 5 RMB 28% 24% 27% 8% 10 RMB 23% 52% 41% 20% 20 RMB 1% 2% 3% 3% 50 RMB N.A. N.A. 2% 8% 100 RMB N.A. N.A. 1% 23% Table 3: Percent of total banknote volume each denomination represents by year; calculated using 1.5 used for value of 1 and 2 RMB set. See Chen [14], Guo [12] A brief history of China’s cash policy until 1998 is given in [12] which divides the growth of the cash culture in China into three phases: 1978-1980, 1981-1984, 1985-1988, 1989-1993, 1994-1997 based largely on the increases of the average yearly net increase in M0 in each period. China’s money supply as expected has largely increased due to the increasing needs of societal transactions, rises in consumer prices, and interest rate policies effect on the money supply. Chinese currency denominations have changed from the first series to the current fifth series of banknotes. The general structure of the banknote compo- sition of the money supply has changed with the needs of society as mentioned in [12]. In Tables 2 and 3, are the % of M0 in RMB and volume for the years 1978, 1987, 1988, and 1998. Consistent with most economies, the largest vol- ume of bills are of small denominations which is necessary in order to produce change and allow small transactions. There have been some large changes in the structure of RMB denominations as the 50 and 100 RMB notes have taken huge share from the 5 and 10 RMB notes since their introduction in the 1987 and 1988 respectively. This is likely, in part to the increasing use and acceptance of ATMs as well as rising demand for high value cash transactions. Guo [12] fur- ther predicts that the 100 RMB note will continue to hold a large share, 80%+ of M0 by value out until 2010. Guo also predicts the PBOC may eventually choose to introduce a 500 and 1000 RMB note though this is speculative. 6 Figure 5: Location of banknote printing facilities and mints in China. Blue circles are mints, green circles are banknote printers, and red circles are note paper producers. China map image courtesy Wikimedia author Rich4. 3. China’s Currency Management and Distribution According to the “People’s Bank of China Law, The People’s Republic of China” the PBOC is responsible for determining how RMB are produced (Zhu and Wang[9]).